By Mark Trewitt
This series of excerpts from the book Integrated Generosity by Mark Trewitt takes a glimpse at three American family dynasties, their exceptional planning strategies, impactful outcomes, and significant charitable commitments. Regardless of the outcome, families impacted by estate taxes will experience unintended outcomes resulting from a lack of education, knowledge, understanding, and action on the part of the parents.
The Romney Family
During his campaign to become President a few years back, Mitt Romney was under normal scrutiny for someone seeking the highest office in the land. Not surprisingly, the Romney family was subjected to a higher level of scrutiny in the press over the course of his campaign. During that time, Mitt Romney’s campaign released his 2010 income tax return, which reflected an income of over $21 million, income tax of only $3 million, and an effective tax rate of just under 14%. This should provide some insight as to your specific circumstances, and whether your own income tax efficiency is where it should be.
From my perspective over more than twenty years as a Certified Financial PlannerTM practitioner, adequate strategies exist to bring the effective tax rate down to this level, especially for charitably minded business owners, including families utilizing FLPs and other entity structures to hold accumulated and growing assets.
Mr. Romney has been efficient in structuring much of his family’s income as long-term capital gains, while creating opportunities for his family to be quite generous regarding their charitable contributions. This is compelling evidence that making charitable gifts during life (which serve to reduce taxable income as well as taxable estate at death) leads to receiving a maximum subsidy from the IRS. The real outcome is that the income and estate taxes, which are eliminated, are redirected to the charities that a family cares about and supports financially.
The effort it may take to achieve the goal of bringing your taxes down as low as legally possible is quite rewarding and may represent a very high return on investment, in terms of the amount of time and expense which may have been incurred in achieving this goal. In Mr. Romney’s case, and specific to his wealth transfer planning, the result is over $100 million held within a generation skipping trust that will never be subject to estate taxes for the current and future generations of the Romney family. According to a 2012 Forbes article entitled “What Mitt Romney Is Really Worth: An Exclusive Analysis of His Latest Finances,” with an estimated value at the time of $230 million, there is probably much more that has been done to further protect the rest of the Romney estate from taxes and other predators.
The proof of the planning ROI for the Romney family is in the fine print, as the disclosure of the income tax return also sheds light on the existence of this trust for the benefit of their five sons. According to a CNN Money article titled, “The Romney kids’ $100 million trust fund,” the trust has grown in size over the years as a result of planning and action which has taken place since the late 1990s. How did the $100 million get into the trust? Through the use of strategies such as:
- Gifts, utilizing annual and lifetime gift exemptions
- Family limited partnerships
- Installment sales
- “Rolling” grantor retained annuity trusts
- Charitable lead trusts
- Intentionally defective grantor trust (this is the structure of the primary trust holding over $100 million in value).
As a result of this planning, the Romney Family does not have an embedded estate tax of 40%+ on the $100 million of wealth that has been transferred into the trust, which includes the growth within the trust. In addition to the trust growth being sheltered, there is another element of using a defective trust for income tax purposes that is important to grasp.
According to the closing paragraph of the CNN Money article: As for paying income taxes on that great growth, Romney is footing the bill. According to his tax forms, the trust is set up as an ‘intentionally defective grantor trust,’ which means the senior generation pays income tax on the trust each year, but they don’t pay the estate tax. That means the sons won’t have to pay a dime on the trust’s earnings until the assets are distributed or the Romneys pass away. Say he was paying a million dollars in income tax on behalf of the trust—that’s like another million dollar gift to the trust because it’s money the trust doesn’t have to pay.
There is an important take away from this living example of pro-active and perfectly legal wealth transfer planning. While many estate owners with smaller (but growing) estates took a laid-back attitude and did very little in terms of wealth transfer during the timeframe the estate tax code was in flux (since before 2000 through 2012), the Romney family was pro-actively using the tools available to them during this period. In doing so, they have become an excellent, living example, proving just how voluntary estate taxes truly are. If Mitt Romney’s 2010 income tax return is any measure, their family is also making significant impact in the area of directed generosity as reflected in charitable contributions made ($2.6 million) during 2010. Additionally, the Tyler Charitable Foundation (their family charitable foundation), has received over $13.6 million in donations from Mitt and Ann Romney in the thirteen years ending 2010.
The preceding real-life example supports many of the precepts from the book entitled Integrated Generosity by Mark Trewitt. To learn more about the book, please visit: http://integratedgenerosity.com/free-e-book--white-paper-series.html where you can also sign up to receive financial advice on charitable giving.